Squarespace, Inc.

Q3 2021 Earnings Conference Call

11/8/2021

spk06: Good afternoon. Good evening. My name is Felicia. I'll be your conference operator today. At this time, I would like to welcome everyone to Squarespace's third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star followed by two. Thank you. Christopher Tu, you may now begin your conference call.
spk00: Good afternoon, and thank you for joining us for Squarespace's third quarter 2021 earnings call. My name is Christopher Chu, and I'm the head of investor relations and corporate development at Squarespace. With me today are Anthony Castellana, founder and CEO, and Marcella Martin, CFO. They will share some prepared remarks and then open up the call for questions. On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics. You can find additional information on how we calculate any of the metrics discussed on this call, including a reconciliation of GAAP to non-GAAP measures in today's press release, which can be found in the investor relations section of our website. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. The matters we'll be discussing include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which include but are not limited to those related to our future financial results, new product introductions, and the company's marketing strategy. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Please take a look at our filings with the SEC for discussion of the factors that could cause the results to differ. Any forward-looking statements that we make on this call are based on assumptions as of today, November 8, 2021, and we undertake no obligation to update these statements as a result of new information or future events. I'll now turn the call over to Anthony.
spk09: Thank you, Christopher. Good afternoon, everyone. Welcome. My name is Anthony Castellano, founder and CEO of Squarespace. Thank you for joining us today as we report another strong quarter of growth and profitability. At Squarespace, we exist to help people with creative ideas stand out and succeed. And as more people choose to turn their passions into ventures, we strive to be the best company to support them as they differentiate themselves, grow their audience, and most importantly, transact with their customers. Our belief in this mission is as strong as ever. During the pandemic, it became increasingly important for businesses to digitize, develop an online presence, and engage with their community. The pandemic accelerated existing trends around e-commerce, solidifying the importance of businesses' transactions with their customers online beyond just selling goods. We believe these trends will continue to define e-commerce. Squarespace empowers and makes it easier for anyone to make great things with an impactful and beautiful online presence. During the quarter, we took significant steps to scale our business and introduce new differentiated product features to meet the evolving needs of our customers as an all-in-one platform. We continue to execute across several growth levers, including deeper penetration of multimodal commerce. Commerce is a critical growth driver moving forward as we continue to expand our offerings for consumers. New and renewed marketing campaigns with some of the biggest global brands, which highlight the diverse selling opportunities available to Squarespace platform. continue to add national expansion, now to more than 200 countries and territories with eight languages and growing, as well as a revamped Circle professional referral program. Before Marcel does the financial details, I'd like to highlight a few notable achievements this quarter. First, we surpassed a significant milestone by crossing 4 million unique subscriptions, a testament to our all-in-one platform and Squarespace's ability to continue to attract new customers. Second, our revenue grew 24% year over year, an achievement against a strong Q3 in 2020. Also, on a trailing 12-month basis, we achieved $749 million in revenue, of which $210 million was commerce-related revenue. We've done so while maintaining strong gross margins of 84%. Finally, our adjusted EBITDA and unlevered free cash flow this quarter exceeded the high end of our guidance, which gives us the flexibility to invest further in a business. We believe our combination of scale, growth, and profitability places us in an elite class of technology companies with compelling financial profiles. There are over 800 million small businesses and self-employed ventures globally that need our support. We remain confident in the long-term trajectory of the creator economy and our many opportunities for future growth as we continue to scale our business profitably. In September, to support our new platform vision of everything to sell anything, or what you have all known as our multimodal commerce approach, we have announced a series of new product features and improvements to existing products focused on helping our customers sell online in multiple ways across physical products, digital content, classes, appointments, and reservation. With more and more people thinking up creative ways to sell the things they're passionate about, we're focused on providing today's entrepreneurs with everything they need to thrive all in one seamless integrated platform. To highlight two specific new launches as part of our roundup, first, we launched Squarespace Video Studio, which is an app that helps anyone create professional-level videos that promote their business and tell their story effortlessly. The app pulls in content and brand elements from their website in order to create marketing materials that mimic their site design. Within our many updates to Unfold, our award-winning app to help anyone stand out on social media, we'd like to highlight BioSites. BioSites are quick, simple websites that users can create directly on their phone intended to go into social media bios. These simple sites can route visitors to deeper content and functionality depending on what the creator would like to optimize for. This enables linking to other sites, monetizing content, or collecting tips. These updates were inspired by the trends of the evolving small business landscape and a flourishing creator economy. With services-based businesses poised for increasing levels of success, as many businesses broaden their way to transact. Everything to Sell Anything is a broad vision to help our customers convert their dreams into ventures. The introduction of these products and updates was done in conjunction with the Launch Bar Everything to Sell Anything campaign, which we continue to run internationally to reinforce our positioning. This campaign was syndicated by many news outlets, and we received an incredibly positive response. As part of our ongoing investment in international markets, we've begun launching local campaigns as well, starting with Australia and the United Kingdom. For instance, in Australia, our Make a Name for Yourself campaign aimed to inspire, encourage, and celebrate local entrepreneurship. The campaign aims to bold individuals to turn their personal experiences and ideas into a beautiful online presence reflective of who they are. I'm incredibly excited to pair our evolving platform and product innovations with such a beautiful and telegraphic campaign, which I think resonates very well with the next generation of entrepreneurs and creators. I'm looking forward to seeing everything they do with Squarespace. With that, I pass it to Marcella Martin, our CFO, who will walk you through the financials.
spk05: Thank you, Anthony, and thank you, everyone, for joining today. We are excited to share our third quarter results, and we continue to be even more excited about our fundamentals and the state of our business. We delivered strong revenue growth this quarter ahead of expectation. Revenue was 201 million in the quarter, an increase of 24% over the same quarter last year, driven by strong performance across both presence and commerce. Our commerce revenue reached 60 million, representing 55% year-over-year growth which includes stocks revenue. Bookings grew 22% during the same period, and we achieved annual grant rate revenue of $789 million as of the end of Q3, 21% higher than prior year. Continued strong revenue, bookings, and annual grant rate revenue were driven by growth in unique subscriptions of 13.5% year-over-year. ARPUs grew almost 6% to $198 due to growth in commerce, including our scheduling product, and the addition of hospitality services offered through TOC. We delivered adjusted EBITDA of $38 million, a 19% margin, and a lever-free cash flow of $47 million, a 24% margin. We achieved year-over-year revenue growth of 24% over a strong Q3 last year. Breaking it out, presence revenue grew 14% year-over-year, and our commerce revenue experienced 65% year-over-year growth. Presence revenue was driven by strength in personal and business plan subscriptions, as well as healthy growth in Google Workspace, which we account for on a net revenue basis, and social products. We delivered a total of 60 million in commerce revenue this quarter, which grew 55% versus Q3 2020 through COVID. Organically and without the inclusion of talk revenue, commerce would have grown approximately 34% year over year. Commerce revenue was driven by strength in our basic and advanced commerce subscription plan, as well as continued strong growth in our multi-model offering, office scheduling and campaign. Driven by the strong growth in our commerce business, commerce represents an increasing percentage of our overall business. As of the end of Q3 2021, commerce represented 30% of our total revenue. The total transactional or non-subscription revenue represents 25% of the total commerce revenue. Non-subscription revenue continues to grow as a percentage of revenue on a year-over-year basis as the GMB that flows through our platform continues to increase. GMB has grown 38% this quarter versus last year. We saw particular strength from services-based GMB, notably from our scheduling product. The inclusion of stock-related GMB contributed to the year-over-year growth rate, though labor shortages in the hospitality industry impacted our expectations of its potential growth. Physical goods represent a meaningful portion of our GMB mix. some of which was impacted by issues related to the global supply chain. Trend-wise, during the quarter, GMB dipped during the summer months, picking up in September. Finally, our take rate has stabilized quarter over quarter as we will now include the payment processing services through talk going forward. Our results this quarter were strong, and we believe issues facing the global supply chain and labor shortages in the hospitality industry adversely impacted our commerce business, and growth could have been even higher but for these issues. We are very excited about our growing revenue base. our total annual run rate revenue has grown to $708.6 million, or 21% higher than the annual run rate revenue at the same time last year, and represents a 42% increase compared to the end of Q1 2020. Markets outside the U.S. continue to be a driver for Squarespace, and our international expansion is one of the more important areas of growth and focus. After reclassifications that shifted some of the revenue from the U.S. to international, our international revenue was almost 62 million in the quarter, representing a 23% year-over-year growth rate and 31% of total revenue. The reclassification pertains to certain revenues which should have been classified as international revenues during Q1 and Q2 of 2021. Accordingly, in Q3, we reclassified approximately 4.1 million and 5.1 million related to Q1 and Q2, respectively, as international revenue. Using the updated reclassification in 2021, Q1, Q2, and Q3 international year-over-year growth would have been 37%, 34%, and 23%, respectively. Further, Q1, Q2, and Q3 U.S. year-over-year growth would have been 29%, 30%, and 24% respectively. These changes are outlined in our thank you. Much of the growth was driven by our performance in the English-speaking countries, including Australia, UK, and Canada. In addition, we continue to invest to expand our offerings to other non-English-speaking countries. As part of our international expansion strategy, we deepen our marketing efforts across key geographies, such as Germany, UK, and Australia. We recently launched two new languages for websites, Swedish and Dutch, and we plan to expand our supported languages further, beginning with Norwegian and Danish in the first half of 2022. This quarter, we observed some macroeconomic headwinds, particularly on new business formations. According to the U.S. Bureau of Labor Statistics, the growth rate this quarter fell approximately 18% year-over-year, with a steeper month-over-month decline in July and August. We believe this had an impact on customer acquisition this quarter as compared to the previous year, as the unique subscription growth rate in Q3 2020 was one of our record high quarters. The downward trends we saw in July and August recovered significantly in September, where business formation growth remained flat year over year. Further, we continue to believe that a square space make it easy as ever to start the business, and these secular trends support a massive growing market opportunity that will allow us to continue to expand our customer base and revenue over time. During the third quarter, unique subscriptions grew 13.5% year-over-year to over $4 million. As a reminder, a unique subscription may account for both presence and commerce revenue, as it represents a single count of what could potentially be multiple offerings. This growth has been complemented by a 6% year-over-year increase in average revenue per unique subscription to $198, over 3% of which was organic growth versus $188 in the previous year. As we have accelerated the pace of adding new products to the all-in-one platform over the last two years, we continue to see immense opportunity in cross-selling various subscriptions throughout the customer base. Workday has a strong fundamental, including attractive margin profiles. Our gross profit margin was 83.6% in Q3, slightly below Q3 2020, though slightly higher sequentially due to the consolidation with stock, where payment processor fees represent the largest component of stock's revenue. Our strong gross profit margin allowed us to continue to invest in R&D, which grew 27% year-over-year to $49 million, and marketing and sales up 35% versus prior year to $80 million. G&A expenses have now returned to a more normalized level without the impact of the direct listing cost, but it's still growing 168% year-over-year, growing to $32 million. Part of this increase was driven by the market performance stock-based compensation grant. Our strong fundamentals are also reflected in non-GAAP margins and profitability measures. Adjusted EBITDA was $38 million in the third quarter versus $41 million a year ago. Our unlevered free cash flow grew to approximately $47 million this quarter from approximately $45 million in the prior year, driven by higher revenue partially offset by a decline in networking capital. Q3 unlevered free cash flow exceeded the midpoint of the guidance range by approximately $24 million. The main reasons for these positive variants relate primarily to the timing of prepayments, timing of certain tax payments, and delays in capital projects. We have a strong and healthy balance sheet. Cash and investments reach over $200 million at the end of the quarter. Our net leverage improved this quarter to approximately 2.3 times the last 12 months adjusted EBITDA. And let's move on to fourth quarter guidance and what we are expecting in the full year of 2021. For the next quarter and full year 2021, we are cautiously optimistic given the strength in our business and some of the macro factors impacting Q3 that could continue or worsen in Q4. Our guidance reflects this. We remain confident that growth in our commerce business will continue to outpace present, driven by a strong adoption of our diversified multimodal offering, such as our e-commerce stores, scheduling, campaign, member areas, and talk. Near-term uncertainty driven by three macroeconomic factors may create some headwinds. These include the overall trends related to business formations in the U.S., global supply chain issues, which affect physical product GMB, and continued labor shortages that impact the hospitality industry in multiple ways. Our guidance assumes these headwinds remain through the end of the year. Improvement or further deterioration in Q4 could either positively or negatively impact our results. Therefore, in Q4 2021, We expect to achieve total revenue between $203 million and $206 million and an unlevered free cash flow between $7.7 million and $12.7 million. This implies a year-over-year revenue growth rate between 18% to 20% and an unlevered free cash flow margin between 3.8% and 6.2%. we expect our margin to be seasonally lower in Q4 due to an increase in prepayments associated with Q1 advertising spend. Unlevered free cash flow is comprised of cash flow from operating activities between $11 million and $17.3 million, capital expenditures of $5.8 million and $7.3 million, and cash paid for interest expenses net of associated tax benefits between $2.5 million and $2.7 million. The majority of the unlevered free cash flow we generated above our guidance in Q3 2021, we expect to be paid in Q4 2021 based on the timing of certain expenses and prepayment. For our full year 2021 guidance, we have increased our total revenue expectations to between $780 million and $783 million, from $772 million to $780 million previously. This implies a year-over-year revenue growth rate of approximately 26% at the top end of guidance, which would have been an acceleration of the 2019 annual revenue growth rate of 24% and slightly below our 2020 annual revenue growth rate of 28%. We also expect a lever-free cash flow between $117 million and $122 million, from $102 million to $116 million previously, representing a margin between 15% and 16%. The guidance has increased primarily based on the increase in the full-year revenue guidance and timing of prepayments. Cash flow from operating activities is now between $119.2 million and $125.5 million, capital expenditures of $12.5 million and $14 million, and cash paid for interest expenses net of associated tax benefits between $10.3 million and $10.5 million. Growth opportunities abound at Squarespace. We continue to deliver our financial goals, and we remain focused on execution. Our opportunities are significant. continued growth of multimodal commerce, geographical expansion, enterprise and expert communities are the key focus areas. We remain very optimistic on the long-term secular trends in our industry, the large total addressable market, as well as our ability to execute against our plan. We would like to remind the audience that our Virtual Investor Day will be held on Thursday, November 18, 2021. We are very excited for this upcoming event next week and the opportunity to share more on the Squarespace story and our future. It will be a webcast beginning at 1 p.m. Eastern Standard Time, and you can find the registration details in the events and presentation sections of our Investor Relations website. And with this, I will pass it on to Anthony for final remarks.
spk09: I'm incredibly proud of our achievements this quarter. We are making excellent progress towards a vision of not only helping our customers represent themselves online, but also helping them transact with their customers no matter how that transaction may occur. This wave of existing businesses transacting online in many ways, along with the new generation of creators and entrepreneurs, will drive durable growth for Squarespace in the years to come. In closing, I'd like to thank all of our employees, partners and customers, and shareholders for their ongoing support. Thank you again. We look forward to seeing many of you at our Investor Day next week.
spk00: Thank you, Anthony and Marcella. We'll now turn the call over to Q&A. Operator, please open the line for questions.
spk06: Ladies and gentlemen, as a reminder, please press star followed by 1 to register for a question. The first question we have comes from Trevor Young from Barclays. Please go ahead, Trevor. Your line is now open.
spk12: Great. Thanks so much. Just on the GMV comment, Marcella, I think you noted that it dipped in the summer and then picked back up in September. I just want to clarify that you're saying that growth slowed in those summer months but didn't actually decline year on year. Is that correct? And then how has that trended so far into October? Have we seen kind of stable trends, improvement, any detail that would be helpful? Thank you.
spk05: Hi, Trevor. Thanks for your question. Yes, you hear that correctly. It was a little bit soft on the goods side, very strong on scheduling, and we attribute that to the macro trends that you see with supply chain challenges so far. And October, what we have seen so far is according to what we had expected.
spk12: Great, thank you.
spk06: The next question we have comes from Sterling Otte from JP Morgan. Sterling, your line is open.
spk02: Yeah, thanks. Appreciate it. I want to follow along that line of questioning, but kind of expand upon it. So you mentioned a number of factors, the business starts in the U.S., supply chain constraints. I wonder if you could just kind of characterize the magnitude, what's having the bigger impact on the business and how are you managing your marketing spend in particular in light of those elements?
spk05: Hi, Starling. Look, I mean, we had a very good, strong Q3 financials. And what we can tell you is that scheduling performed really well and above what we had anticipated. We have a very powerful set of tools for creators and, you know, any professional that want to save their time. And we are very happy with the performance that we have had so far. I think that all of our scheduling tools for events, appointments, and so on are putting us as a leader in this space. Online commerce also performed better, a little bit better than what we had expected, and we believe that commerce will continue to grow and will become a more meaningful contributor to the overall mix of our top-line growth. Unique subscriptions perform a little bit lower than what we had expected, and we attributed that to the slow U.S. business formations that we saw in July and August, combined with a little bit of seasonality in international. Summer months typically drive lower conversion rates. What we have seen in talk is that we seated a record number of diners in the quarter. So we are quite pleased with the performance of the business from a volume perspective. However, the product mix was the driver of the lower than expected revenue for payments. We see subscriptions continue to increase. But what we have observed in TOC in particular was that the business had been impacted by labor shortages, as very well known in the industry and how that is impacting the hospitality industry in general. And again, I mean, the supply chain has impacted. We believe that it has impacted the growth of GMB on online commerce stores. And again, I mean, the strength that we have seen in GMB has come for the most part from our scheduling tools.
spk02: That makes sense. And then maybe one quick follow-up. I think there's a lot of discussion around what might happen to the e-commerce world as we go through the holiday season in light of the supply chain constraints. I think you mentioned that in your guidance, you're assuming that the constraints continue. But in particular, how have you kind of factored in the e-commerce environment for the holiday season in light of those constraints?
spk05: What we have assumed, of course, you know, we are optimistic about the business. You can see the performance that we have had in Q3. But we are cautious because, you know, the holiday season may also impact our scheduling business, which has performed really well so far. But, you know, consumers may shift spend towards goods, you know, or sorry, towards travel and entertainment, right? And if that occurs, also what we can, you know, what we could expect is that that could impact the growth that we had in, you know, considered for unique subscriptions or websites on domain. And GMB, of course, you know, we are, again, I mean, we are very optimistic about the Q4 season, but we remain cautious because of the supply changes and also for increases. I mean, The food inflation, the food price inflation is real, and that can impact, of course, talk and our, you know, commerce stores.
spk09: Yeah, I think just to add to what Marcel is saying, you know, within Squarespace's revenues, you're seeing a pretty dynamic picture emerge, really, where, you know, our business a decade ago or five years ago was going to be mostly defined by new website creation domains and, to a lesser extent back then, people transacting through the platform. And now you're seeing a business that has revenues from scheduling, revenues from hospitality, revenues from to-go ordering, revenues revenues from events, revenues from member areas, and all these different ways that we're enabling people to transact. And so in any given quarter, I think you're gonna see, insofar as these macro events keep kind of washing over us, those revenue streams impacted in different ways at different times. For instance, you know, when COVID started, our scheduling business was really hit hard for a couple of months and now has picked up and, you know, is one of the strongest performers within that commerce portfolio. So, yeah, I don't think any one individual business trend that we see there is going to have such an outsized impact, but they are all real. And, you know, depending on the sector you're looking at, the subsector within Squarespace, they're going to play out in different ways.
spk02: Excellent. You guys appreciate it. Thank you.
spk06: Thanks. Next we have Siti Panigrahi from Mizuho. Please go ahead.
spk07: Thanks. Congratulations. Good quarter. So, Anthony and Marcella, I want to ask you about, you know, in the beginning and for Q2, you were a little concerned about Delta variant, and you also talked about some of your concern heading to Q4. But what are the areas that exceeded your expectation in Q3? And as you're looking forward to Q4, what are you think, you know, going to be key driver Q4 or in next few quarters?
spk05: Yes, thanks, Didi. Yeah, I mean, we have been investing over the long run in the resilience of the business. And this is what Anthony was trying to portray earlier when he was talking about the different revenue streams that we have so far. And what I was trying to convey was that, for example, in a COVID environment or in a Delta environment with lockdowns, we could have expected that for business and domains, those were going to thrive, while our scheduling business and unfold business would have been negatively impacted, right? And the opposite would occur without lockdowns. So what we have seen in Q3 that performed really well is commerce stores continue to perform well, though GMB has been impacted, particularly for goods. When I say it has grown, but it hasn't grown as strongly as the scheduling, the GMB for scheduling businesses. Scheduling has performed really, really well, and unique subscriptions were a little bit lower than what we had expected, part of that because of seasonality, and part of that we believe it is because of the U.S. formations business as our overall business continues to be skewed towards domestic, right? And again, I mean, we stopped. We are quite excited about the business. Record number of diners in the quarter, so that's a major, you know, milestone for the business. So transaction-wise, the business is performing really well. It's getting the traction that we were expecting, and, you know, we are even more excited with the tools that we can continue to create to support, these time-slotted businesses for the hospitality industry.
spk07: And, Anthony, late September you introduced so many features, and how does that expand your competitive positioning? And also the new campaign, Everything to Sell Anything, how do you see that campaign going to drive any kind of growth there?
spk09: Yeah, well, I'm really proud of the team, and I'm proud of what we released, and I love the new positioning. It's inherent in that campaign because, you know, I think multimodal commerce maybe is not the best way of describing, you know, what we do from a consumer perspective. But I think... Yeah, everything that's not anything is. And, you know, along with a couple releases, you know, we highlighted Biosites and Unfold. We highlighted, of course, this video studio coming out. There were a slew of other improvements across the product lines. And, really, we used it as an opportunity to sort of recap and say, hey, you know, Squarespace is not just websites and physical commerce. It's so much more. It's tools for the hospitality industry. It's tools for appointment booking and scheduling. There's new emerging business models we want to highlight, things like member areas, which we're going to expand into, more tools for online courses and video. And, you know, it's just... There's this huge opportunity in commerce out there that is just beyond simple physical commerce. I mean, that's, of course, big, too. And, again, I've said it on previous calls, we have almost a decade of investment in our commerce engine. And it's one of the most powerful ones on the Internet. But when you combine that with all these other ways to transact in one platform in one company, I think it's where Squarespace is really going to start to shine, certainly shining now. But we're going to lean more into that in years to come. And, you know, you see that reflected in the numbers as well with $60 million in revenue. That's about 30% of our revenue just around there, you know, this quarter coming from those commerce-related activities. And we think that's just going to continue to grow. Yeah.
spk07: That's great. Thank you. Thanks for this, Carla.
spk05: Thank you. Thanks, C.D.
spk06: Next question comes from Josh Beck from KeyBank. Please go ahead.
spk11: Thank you, team, for taking the question. I wanted to go back to the international growth. Obviously, that's been one of the future opportunities for you as a business. I think this quarter it was similar or maybe a touch below U.S., Was that maybe related to some of the measures that we've seen in Australia and some other countries? Just curious maybe what some of the impacts were this quarter and how we should be thinking about those trends over a longer time horizon.
spk09: So, in short, thank you for the question. So, in short, yes. I think, you know, as we see the climate very, I mean, just very different scenarios in various regions. But, you know, from an international standpoint, we continue to introduce new languages. Marcel mentioned, too, coming in the first half of next year. We've been pushing with localized campaigns. Actually, in the slide materials on our YouTube channel, you can see some of what we did in the U.K. and Australia. And we're going to be launching new payment mechanisms. So, you know, we have CEPA on the horizon, which will further enhance our ability to convert in those international markets. But, you know, just to circle back around to the beginning of the question, yeah, I mean, depending on where people are allowed to travel, what's locked down, what's opening up. And part of what we're seeing is just kind of interesting, and it was – we touched on it as part of the prior answer, just because a lockdown exists or doesn't exist, there's all kinds of dynamics that are created now post-lockdown. All the supply chain issues, labor shortages, all that, that's not, I don't think a lot of people could have maybe known exactly that that was going to play out quite like that. And they're affecting different industries and different regions in a disparate way.
spk11: Very helpful. And then maybe just a follow-up on unique subscriptions, obviously the last two years where we have a lot of the quarterly detail, very unusual time for a lot of reasons. So as we think about next year, anything to call out with respect to seasonality? Is there a bit of a New Year's halo where you start to see stronger formation in a typical year? Just anything that we should be calibrating on just in terms of seasonality for next year?
spk05: Hi, Josh. Look, I mean, let me walk you through typical seasonality of unique subscriptions on a non-COVID year. Q1 is the strongest, and Q3 are strong, and the lowest are typically Q2 and Q4. Actually, Q4 is stronger than Q2, right? That's That's on a regular basis. But I just want to call out that because of the nature of the unique subscription, like Unfold is not a product that is fully attached yet to websites or to domains. And so unique, typically Unfold, they count as unique. And then we have the other set of subscriptions, domains, and like member areas, campaigns, etc., that they get attached to each other and that they account for one. The reason why I'm clarifying this is because Unfold has a slightly different seasonality than the rest of the, what I would say, the whole unique subscriptions, which is that typically Q3 is the strongest, actually, with Q1 is the strongest quarters for Sorry, excuse me. I'm saying Q1 and Q2 are the strongest for unfold, and Q3 and Q4 are the weakest for unfold. So overall, what we can expect is that as we moved into 2022, the seasonality will remain as I have, you know, explained it to you before, where Q1 is going to be the strongest quarter and Q2 the weakest.
spk11: Very helpful context. Thank you, Marcella. Thank you, Anthony.
spk06: Next question comes from Navid Khan from Truist Securities. Please go ahead.
spk08: Hi. Thanks a lot. Maybe just a quick clarification on the trends you described in terms of growth over the summer. You said July and August, September saw some improvement, and you said that October is consistent with your expectations. Can you maybe just compare and contrast October versus September, and has the recovery in September sort of continued into October, or has it even hinged higher, or how should we think about that? And then I have a follow-up.
spk05: Sure. Hi, Nabil. October has been a little bit of a stronger month compared to September, though we still remain cautious on how the business formations will remain for the rest of the year, just because of the typical trends that we see in the industry. One more thing that I alluded earlier, I don't know how clear it was, is we yet need to see when borders start to open up and consumers may shift this year in particular more compared to other years as they have been stuck in their home for almost two years. They may shift expense towards more traveling and entertainment rather than typical services or websites or domains. But so far, what we feel at the moment, we are confident with the guidance that we are provided based on what we have seen so far. And so far, what I'm saying so far is same as of today.
spk08: Understood. That's super helpful. And maybe just a bigger picture question. So in terms of hospitality and leisure, how should we think about that as a subcategory? How meaningful could it be if it recovers? either through, you know, growth in payments and your ability to kind of capture that or other things. Just maybe speak to that.
spk09: Oh, thank you for the question. We think it could be huge. That's, you know, why we were so excited to partner up and join forces with TOC. You know, we have so many businesses on the platform that are hospitality-based businesses, service-based businesses, event-based businesses, time-slotted businesses. And, I mean, you know, hospitality industry, I don't have the figure off the top of my head, but what percent of it is our whole GDP? It's like four percent, something like that. Someone needs to check me on that number. But it can be absolutely massive. In fact, I think when you look across all of the revenue streams that we have enable within our commerce offering all of them can individually be you know if you could have a company just doing one of them and it can be a very very large company and that applies to scheduling and appointments that applies to time-slotted businesses and that's to go ordering um reservations events that applies to e-commerce of course which we've all you know seen and we've got some bets on some newer things like member areas where we think that there's a lot of businesses out there that are going to want to sell time and expertise and provide access to video classes and courses and paid newsletters. All of those, I think, can be very big on their own. And the powerful part of what we do is that we've got all of that in one single platform. And I think it just sets us up really well for the future because, again, as we were referencing early on this call, You know, this business is not, you know, we just need another website, another website, another website. Or we put all our eggs in one basket on e-commerce. Or, you know, the scheduling industry, like the types of businesses that are being powered by our scheduling product are affected. Everything else is lost. We're trying to set up a really robust and durable revenue stream and one that can grow with these customers. I think if you look at Squarespace five years ago versus today, the big difference is the more we're part of that commerce transaction, we get to scale with our customers, sell them more services, but also as they transact more, we're able to grow with them. five, 10 years ago, let's pick 10 years ago, that's definitely not the case for SquareSeries. If your website gets a bunch more traffic, bandwidth and storage is commoditized in our industry for small sites years ago. So this is an exciting time for us. And I think when you think about any one of those revenue streams that I'm referencing there, and you take a 10-year view and think, okay, or even a five-year view and say, are people going to be booking More orders online, more appointments online, selling more online, you know, or less in five years. I think the answer is clearly more in all of the basic categories that we service. We've intentionally gone for really, really broad revenue streams, right? There's a lot of niches within them, but, you know, these categories I'm describing are just, you know, they're really big.
spk05: Yeah, and just to add to that, like, I think we, you know – all of the services, tools that we have in the platform are positioning us as the leader, you know, we believe as the leader in the marketing services in particular. When you think about the TOG application, right, it's a tool that was born to help and, you know, serve restaurants. But it's actually a tool that has expanded to much more than that. And we have distilleries wineries, museums that use that tool. So it's quite exciting. And, you know, combined with the scheduling where we tackle a lot of the health and wellness industry, I think that, you know, as Anthony said, we are very, very well positioned for the future.
spk09: Yeah, we've got really diverse, wide coverage there. But I'd also like to emphasize that we actually go very, very deep in these different categories. Because if it was just surface-based, if we just kind of went out there and said, oh, yeah, we've got scheduling, sure, we have to go ordering. I just don't think that that would translate to actual meaningful revenue because we wouldn't be really powering that. the kind of businesses that we have always attracted to our platform. I mean, Squarespace has always attracted a customer set that was more serious, more design conscious, wanted to pay, and really wanted to succeed and stand out. And so we have to pair that with deep functionality, not just surface-level functionality. And I think when you look across our product offering, we are really – We're in an incredibly unique spot with regards to that, considering what we've built and what we've bought.
spk08: Makes sense. Thank you, guys. Thank you.
spk06: The next question comes from Ken Wong from Guggenheim Securities. Please go ahead, Ken.
spk10: Fantastic. Anthony, I wanted to circle up on something you touched on earlier in your call. You mentioned revamping your referral program, your partner referral program, something we've kind of heard might be in the works. Just would love to get your sense for what's changed there, how that might potentially drive subs down the line, potentially change your commerce mix to the extent that you're moving a little more upmarket, and any color there would be fantastic.
spk09: Thanks, Ken. Yeah, so we introduced a new referral program. We've been testing it in non-USGOs for a little bit and seeing how it performed, but we started to roll that out across our whole Circle program just to help incentivize people who are already on the platform, already building on the platform, to build more on the platform and to share in our success. I'd say two things there. One, the Circle program, which is of course our professional community, has always been incredibly important to us. Squarespace has always been a favorite choice of designers and web professionals because of our design orientation and the fact that if they're using us, they're able to get out of the box so much further than if they would have to fix the design on something that's kind of inherently out of the box, a little more broken. So, yeah, we've always resonated very well with that community, and it's just another step in us partnering with them and servicing them. The other thing that I'd like to help equip them with is, you know, we've got tens of thousands of people out there putting sites on Squarespace, and that means that they're in front of businesses as they're getting started. And I think that that gives us an opportunity for things with, for instance, talk, to say, you're setting up a new restaurant, you're producing a website for an event, consider plugging in this system versus something else that integrates better, et cetera, et cetera, as you're getting your clients set up. So that puts us in a really great spot, and it's one that if you were, for instance, talk standalone, you really wouldn't be in front of because you don't have tens of thousands of people in front of small businesses that are right there when they're getting set up. So Circle remains really important to us. Excited about the referral program rolling out more broadly now as opposed to us just testing it locally. And I'm excited about equipping the Circle members to help really introduce their clients to our broader range of services. There's so much more they can sell them on Squarespace right now than they could three, four, five years ago. It's just a completely different product portfolio.
spk10: Got it, got it. Really appreciate the color on the cross-sell opportunity. And Marcella, just wanted to just Take a quick cut at just leverage. Looks like a lot more profitable this quarter. I guess how much of that might be short-term in nature? Perhaps you guys dialed back on marketing with the funnel looking a little softer, labor shortages, as you mentioned, maybe put a dampener on hiring ramp. Is the number we saw in Q3 and how you're guiding Q4 kind of the right numbers to build off of, or should we expect that there maybe is a little bit of pent-up demand and kind of the cost might flow back in a more meaningful way once some of this macro stuff clears?
spk05: Hey, Ken. We had a little bit of a shift of schedule. spend from Q3 to Q4, and mostly related to hiring, right, and the hiring piece. But other than that, I mean, we have been pretty aligned on the rest of the expenses with what we had expected originally.
spk10: Great. Thanks a lot, guys.
spk05: Thank you.
spk06: Next, we have Brad Erickson. Brad from RBC Capital Markets. Please go ahead.
spk13: Hi, thanks. I want to come back to the net sub-ad. It sounds like things improved in September and then again a bit in October. So I guess the question is we kind of try and dimensionalize the net ad levels going forward. Would you say it's fair to say we're approaching, say, COVID levels once again after that sort of summertime seasonal slowdown. I mean, if you look at it, you just did more in Q3 than Q1, but less than Q2. So just trying to get a sense of any sort of baseline run rate you're seeing and expecting in terms of net sub ads as we look forward, hopefully beyond COVID and obviously what's baked into the guide. And then I have a follow up. Thanks.
spk05: Thanks for the question. Actually, what we have seen is that we have accelerated the pace of new unique subscriptions compared to 2019 for the last couple of quarters. So, I mean, in terms of seasonality, we are, you know, we are considering that we are going to go back to a little bit of what it was, you know, 2019 in terms of seasonality, but definitely not the pace of the growth compared to 2019 because we believe that we are going to grow unique subscriptions faster than what we do in 2019.
spk13: That's very helpful. Thanks. And then just to follow up, we may have missed it in the filing or the presentation, but can you give us TOCS contribution to revenue in the quarter, please? Thanks.
spk05: Well, I mean, we have reported the growth, so I think you can, you know, determine that from the previous, you know, the previous figures that we have reported. and the current organic versus inorganic growth. Organically, we grew 34% year over year, and total growth has been 55%.
spk13: That's great. Thank you.
spk06: Next question comes from Aaron Kessler from Raymond James. This is the last question. Please go ahead, Aaron.
spk03: Great, thank you. Maybe just on all the questions that have been asked, but maybe on marketing tools, can you talk about maybe what's in the roadmap maybe for additional marketing solutions for SMBs? And then maybe just the timing of kind of some of your local language rollouts as well. Thank you.
spk05: Aaron, sorry, you sounded very choppy. So you were asking about marketing tools?
spk03: Yeah, just maybe additional marketing solutions you're thinking that you could be rolling out for your clients and kind of with some of your key marketing tools today?
spk09: Yeah, so right now the marketing tools portfolio consists of video studio, what we're helping with in SEO, email campaigns, those sorts of things. We haven't talked about exactly, you know, what's coming up on the roadmap next, but it's sort of things that are going to be kind of in that vein for small businesses.
spk03: Got it. Great. And just any update, kind of the timing of some of the local language rollouts as well?
spk09: Marcel, correct me if I'm wrong, but Norwegian and Danish in the first half next year? Yes. Those are the next ones on the queue. And then also, no specific timing on it, but CEPA will happen at some point soon. And, you know, that will help us in regions that expect that. Got it. That's helpful.
spk03: Thank you.
spk06: And it seems we have time for one more question. Next would be Matt Pfau from William Blair. Please go ahead, Matt.
spk04: Okay, great. Thanks, guys, for fitting me in. Just wanted to ask a couple clarifications on the comments around TOC and specifically what drove the mix of lost payments with the diners being up. And then the labor impact, how do we think about that? Is it just lower capacity at the restaurants because of the labor issues? Is that the main impact, or is there something else there to think about? Thanks.
spk09: Sure. Thanks for the question. I'll give a couple remarks on each. So first off, during the pandemic, TAC started as a business that was basically centered around diners buying experiences in restaurants and that reservation system. Obviously, that went to almost nothing as the pandemic rolled around and lockdowns occurred. And they launched a to-go ordering business so that those businesses could thrive during that time. And actually, that was really, really, really well received, and a lot of businesses used that. The to-go business has a different margin profile than the bookings-based business. And over the past... two quarters as people have really started to return to restaurants. Marcel noted earlier that it was a record quarter for talk and people eating in those restaurants. That revenue shift has shifted back more to being in person versus to go. And so we have a number of things we're looking at there to address that. But it's, you know, activity on the platform is very, very high, tons of attention on it, and we'll just keep adapting as we see those trends kind of move back and forth. But the good thing is we have both those revenue streams on the platform, so we'll be able to capture demand off of both. When we were talking about labor shortages and supply chain issues and how that affects hospitality, well, first off, with the supply chain issues, restaurants may not be able to open for one of two reasons. One, the cost of goods or their ability to access just, you know, the raw materials they need to serve customers is impacted by all of this. And if you're in that world, you know, shifting your payment, your reservation system is probably not at the top of the list of things you want to pursue right now. Also, with labor shortages, that's also affecting their ability to open. If they can open, they might not be able to open at full capacity. All of that is happening and swirling behind the scenes as we move forward. We're still very optimistic about the future with talk. Again, just the amount of activity on the platform, the amount of diners using the system, the versatility of the system, the ability to apply it to other time-slotted businesses like events is stuff that we're really excited to do. And, again, as we move into next year, TOC has its own roadmap that's, you know, really exciting from a product standpoint. And, you know, it's going to be a great 2022 with them. Great. Thanks.
spk04: Appreciate it, guys.
spk06: With that, I will hand back to the management team for closing remarks.
spk09: Thank you, everybody, for joining the call and for the super insightful questions. Look, when I look at the business and I think about how we're situated, I've never – I have never been more confident in how we are positioned because, again, and we've touched upon it on this call, it is not just that Squarespace is dependent on one single revenue stream. It is not just e-commerce. It is not just websites. It's not just domains. It's not just scheduling. It's not just hospitality. We're able to address all of those in one platform, and it leads to these interesting scenarios where these macro events are going to impact one in a different way than it impacts the other. But look, Commerce, as a percentage of revenue, is higher than ever within a company, and we're going to see that continue. So looking forward to an exciting 2022, and we will see many of you later and all of you soon. Oh, and also, just a reminder that we have an investor day coming up next week. on November 18th, and looking forward to seeing many of you there. It will give us the opportunity to really dive into our models a little bit more and to help further the story. Thank you.
spk06: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.
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